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Our Plano bankruptcy law firm offers free initial consultations via phone or in person. To obtain your Free Consultation, simply complete the short form to the right of the page, or call:
(972) 578-1400
The Dallas Law Office of DeMARCO•MITCHELL, PLLC want you to know the differences between Chapter 7 Bankruptcy and Chapter 13 Bankruptcy. There are many important distinctions between these two bankruptcy options. Please read on to learn more about Chapter 7 and Chapter 13 Bankruptcy; then contact us online or call (972) 578-1400 to schedule your free consultation.
Chapter 7 bankruptcy is commonly known as a liquidating bankruptcy or straight bankruptcy and usually lasts about 120 days. The filing of a Chapter 7 bankruptcy petition creates an estate comprised of all assets owned by the Debtor. Nonetheless, the Debtor retains the right to exempt certain assets from the bankruptcy estate and shield them from the bankruptcy process and possible sale by a trustee. In most cases the Chapter 7 Debtor will be able to exempt all of his/her assets under applicable Texas or Federal law. However, if there remain certain assets that do not qualify for an exemption, the Chapter 7 bankruptcy trustee will sell those non-exempt assets. The proceeds from the sale of those non-exempt assets are then distributed amongst the Debtor’s creditors.
The objective or goal of a Chapter 7 bankruptcy is to provide the honest Debtor with a fresh start. This objective, under Chapter 7 of the Bankruptcy Code, is accomplished by granting the Debtor a discharge in exchange for the sale of all non-exempt assets as discussed above. This bankruptcy discharge relieves the Debtor from any obligations due and owing his/her unsecured creditors (exceptions are noted below). In other words, upon successful completion of a Chapter 7 bankruptcy case, the Debtor will no longer be legally obligated to pay any: (1) credit card debts; (2) medical bills; (3) any monies due and owing any secured creditor resulting from the repossession or surrender of the secured creditor’s collateral (i.e. a car, boat, or real property); and (4) personal loans to friends and/or family members. While technically, a Chapter 7 Debtor is also discharged from having to repay any secured obligations (a car loan and home mortgage being the most common), the secured creditor retains the right to repossess or foreclose upon those assets in the event of non-payment. As such, if there are certain assets which a Debtor wishes to retain and which are the subject of a secured loan, the Debtor must continue to make payments to that creditor even after the discharge.
A bankruptcy discharge under Chapter 7 is not, however, without limitations. The Chapter 7 bankruptcy discharge does not eliminate debts for most taxes, student loans, family support obligations or debts from fraud, intentional injuries or damages for driving under the influence of drugs or alcohol.
A Chapter 13 bankruptcy petition requires the Debtor to formulate a plan of reorganization under which the Debtor proposes to re-pay his/her Creditors all or a portion of the debt owed to them over a period of three to five years. In so doing, the honest Debtor is entitled to retain all assets, exempt or otherwise. The Chapter 13 Bankruptcy Plan requires the Debtor to make monthly plan payments to a bankruptcy trustee for the duration of the plan. The bankruptcy trustee, in turn, distributes those plan payments amongst all of the Debtor’s creditors pursuant to the terms of the Chapter 13 Bankruptcy Plan. The Chapter 13 plan payment is intended to address the obligations of the Debtor’s: (1) unsecured creditors, (2) tax obligations; (3) arrearage on secured assets the Debtor wishes to retain; and (4) vehicle loans or other forms of short term secured debt. Note that in most cases long-term secured liabilities like a mortgage, will be paid outside of the plan.
The amount of the Chapter 13 Bankruptcy Plan payment is the difference between the Debtor’s income and the Debtor’s monthly expenses (those expenses reasonably necessary for the support of the Debtor and the Debtor’s dependents). This difference constitutes the Debtor’s surplus income.
There are many options available to a Chapter 13 Debtor that are not available to a Chapter 7 Debtor. For example if a Debtor is behind on his/her mortgage payment, those arrears can be cured within the Chapter 13 Plan thereby permitting the Debtor to keep the home. In addition, many secured claims need only be paid to the extent of the value of the property securing the claim (home mortgages have special rules in this regard). Lastly, Chapter 13 is an ideal vehicle for paying off back taxes and preventing any further IRS levies or garnishments.
SUBJECT |
CHAPTER 7 |
CHAPTER 13 |
| Qualification to file a Bankruptcy Petition | Married or unmarried individuals, corporations, and partnerships may file. | Married or unmarried Individuals owing not more than $307,675 of unsecured debt and not more than $922,975 of secured debt. No partnerships or corporations allowed. |
| Consideration for a Bankruptcy Discharge |
Liquidation of all non-exempt property. |
Completion of all monthly plan payments and other obligations as required by the chapter 13 plan. |
| Length of time in Bankruptcy | Approximately four months from the filing date. | From 36 months to 60 months. |
| Payment to Creditors | Creditors will be paid only if there are non-exempt assets to be liquidated and then only from the net sales proceeds. | Surplus income as established in the chapter 13 plan and, if provided for, the net sales proceeds of any other assets sold by the Debtor. |
| Order in which Creditors are Paid | Priority unsecured claims such as taxes will be paid first with any remainder to be paid pro rata (i.e. same percentage paid) to all general unsecured creditors. | The trustee will pay creditors in the following order: (1) unsecured priority unsecured claims (typically taxes); (2) secured creditors to be paid through the plan; and (3) general unsecured creditors. Secured Creditors paid outside of the plan receive their regular monthly payment directly from the Debtor. |
| Benefits | Upon successful completion the Debtor’s unsecured obligations will be discharged. As for those obligations securing property the Debtor wishes to retain, the Debtor must continue to make regular monthly payments. | Permits the Debtor to retain a house or other secured assets the obligations of which are substantially in arrears. Certain secured claims (typically not a home mortgage) need only be paid to the extent of the value of the collateral. Benefits of a debt consolidation loan with no interest and substantial reduction of principal. Within the context of the plan, discharge certain obligations not otherwise dischargeable under a Chapter 7 bankruptcy case. |
| Credit Bureau | Chapter 7 notation remains on credit bureau for 10 years from the petition date. | Chapter 13 notation remains on credit bureau for 10 years from the petition date. |
 State Bar of Texas |
 State Bar of California |
 Dallas Bar Association |
 American Bankruptcy Institute |
 Collin County Bar Association |
 National Association of Consumer Bankruptcy Attorneys |
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